Elements of Pphysical Distribution System of Goods and Products

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Elements of physical distribution system of Goods and Products!

The objective of physical distribution is to move products from the manufacturer to the customers at as low a cost as possible, keeping in mind customers’ desire for responsiveness. Channel members play important roles in physical distribution, as they may provide the required transportation and stocking points.

i. The aim is to provide intermediaries and customers with the right products, in the right quantities, in the right locations, at the right time.

ii. Effective physical distribution saves cost and improves customer service levels. Cost savings can be achieved by reducing inventory levels, using cheaper forms of transport and shipping in bulk.

Customer service levels can be improved by fast and reliable delivery, holding high inventory so that customers have a wide choice and the chances of stock out are reduced, fast order processing, and ensuring that products arrive in the right quantities and quality.

Trade offs are often necessary, for instance, low inventory and slow, cheaper transportation methods reduce costs but lower customer service levels and satisfaction as well. Determining this balance is a key marketing decision, as physical distribution can be a source of competitive advantage.

iv. Analyzing the market in terms of customer service needs and price sensitivity will reveal two segments:

a. A segment may have low service needs, but can be highly price sensitive.

b. A segment may have high service needs, but can be relatively price insensitive.

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v. Company needs to define its target market, and understand its service level requirements. It should then design an appropriate marketing mix to provide the service level that it needs. For example, a retailer in a small town may prefer to buy in large lot sizes if the manufacturer offers him price discount, because he has space to keep the inventory.

In contrast, a retailer in a metropolitan prefers to buy in small lot sizes, even at higher prices because he does not have space to keep the inventory.

vi. Cost of physical distribution is high, if higher levels of customer service has to be provided because faster means of transport has to be used, and large amounts of inventory has to be kept at multiple stocking points.

Therefore, there is inherent conflict between costs of physical distribution and service level. Similar conflicts arise between elements of physical distribution. Good inventory management advocates low stocks to reduce costs but low inventory may lead to stock outs causing loss of revenue and customer backlash.

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Good freight management advocates faster aircraft deliveries because it meets customers’ requirements of service level better, and also because lesser inventory has to be kept as safety stock and is blocked in transit. But costs of aircraft deliveries can be prohibitively high.

It is important to remember that faster transportation and inventory are substitutes of each other, and either can be used to provide the same service level, but which one of them should be used, depends on the circumstances of the buyer and the capability of the supplier. For example, a retailer can either keep high amount of inventory or use faster means of transportation to get inventory to its store.

If space is available at a cheap rate in its locality, he can keep higher amount of inventory, but if he faces space constraints he can use faster means of transport.

Similarly, if he sells non-perishable, non-technological, non-fashion product with a stable demand, he can keep high amount of inventory, because they would be sold, and the products would not become outdated. But, if he is selling perishable, technological, fashion products with variability in demand, he uses faster means of transport to receive smaller lots more frequently.

Therefore, physical distribution needs to be managed holistically, and its elements managed in such a way that the required service level is met at a minimum cost.

A single manager would be responsible for physical distribution, who would prevent functional managers managing individual functions, like transportation, from maximizing their performance and causing harm to the overall efficiency and effectiveness of physical distribution. He reconciles the conflicts inherent in the system so that total costs are minimized, subject to meeting required customer service levels.

Elements of the physical distribution system:

The purpose of the physical distribution system is to make the product available to the customer. Infrastructure facilities like number and location of warehouses, availability of suitable modes of transport, and the level of inventories that have to be maintained at various locations determine the responsiveness of the physical distribution system.

(i) Customer service

(ii) Order processing

(iii) Inventory control

(iv) Warehousing

(v) Transportation mode

(vi) Materials handling

Customer service:

Customer service is the percentage of orders that are filled in time. It can become ambiguous, and hence it is important to define the desired customer service standard precisely. A company’s customer service standard may be that 80 per cent of the orders are delivered within 24 hours of receipt and 100 per cent are delivered within 48 hours.

Higher standard of service level means that higher levels of inventory has to be maintained or faster means of transportation have to be used, both of which incur high costs.

It is important that the company is aware of the costs of meeting different customer service standards—70, 80, 90, 100 per cent of orders delivered within 24 hours-and extra customer satisfaction which results from raising standards.

It is also important to remember that some customer’s value consistency in delivery time rather than speed i.e., a customer would prefer guaranteed delivery within 5 days each time rather than delivery within a day on some occasions and delivery after a day on other occasions.

Customer service standard can be a key customer choice criterion, and a buyer may choose a supplier depending on whether it can provide its desired customer service level.

A company can improve customer service by:

1. Improving product availability:

By maintaining higher stock levels, and improving accuracy of deliveries in terms of delivery at the promised time and in terms of delivery of the right assortment of products

2. Improving order cycle time:

By reducing time between order and delivery, as well as improving consistency between order time and delivery time.

3. Raising information levels:

By enabling salespeople to have information about inventory levels at various storage points, having more reliable information on order status of customers, and promptness in notifying customers of imminent delays.

4. Raising flexibility:

Development of contingency plans for urgent orders, a structure to ensure fast reaction time to unforeseen problems like product return.

Order processing:

The idea is to reduce time between the consumer placing an order and receiving the goods. A computer link between order department and salesperson is effective. Computers can also check the customer’s credit rating and whether the goods are in stock, issuing an order to the warehousing, invoicing the customer and updating inventory records.

A manager can ask the following questions to know the areas where improvement is possible-What happens when a salesperson receives an order? What happens when the order department receives an order? How is inventory checked? How long does it take to check inventory?

Delineating the steps that will be followed in the above situations will reveal gaps in the process to fulfill a customer order. Customer service levels can be improved by plugging these gaps.

Inventory control:

There is cost of holding inventory, and therefore inventory managers will try to keep minimum stock. But salespeople want to maintain large stock to avoid any probability of stock-outs. It is important to remember that inventory costs rise at an increasing rate as customer service standard nears 100 per cent, because inventory has to be kept to serve every conceivable surge in demand.

It can be very expensive to always have in stock every conceivable item that a customer might order. Companies separate items into those that have high demand and those that have low demand. A high customer service standard is then set for high demand items but a much lower standard is used for low demand items.

If a product has high average demand and low sigma or variability of demand, stock should be kept at multiple retail locations close to the customer. Since sigma of demand is low, the product would be sold and there would be no overstocking.

Since the average demand is high, the product can be transported in bulk, and hence its cost of transportation to multiple locations will not be high. If a product has low average demand and high sigma or variability of demand, it should be stocked at a central location.

If the inventory is kept at multiple locations, the costs of overstocking and under stocking would be high because the sigma of demand is high. The company can use faster means of transport to transfer the product to the customer.

A company also has to decide as to when and how much to order so that stocks are replenished. Unless stock-out is tolerated, the order point will be before the inventory reaches zero. This is because there is lead time between ordering and receiving inventory, and there should not be a stock out as the company is waiting for the ordered items to arrive.

The more variable the lead time, the greater the fluctuation in customer demand during the lead time and higher will be the safety or buffer stock that the company will be required to keep to prevent a stock out.

The amount of safety inventory for a product should be related to variability in its demand. Higher the variability in demand from one time period to another, the higher should be the safety inventory for that item.

Small, frequent orders raise order processing costs because more orders have to be placed but reduce inventory carrying costs because lesser average inventory is held. (The average inventory held throughout the year is equal to half of the order amount. When the frequency of orders is increased, the order amount is reduced) Large infrequent costs raise inventory costs but lower processing expenditure. The trade off is the EOQ (Economic Order Quantity).

Warehousing:

Warehousing includes all activities required in the storing of products between the time they are manufactured and the time they are transported to the customer. These activities include breaking bulk, making product assortments for delivery to customers, storage and loading.

Storage warehouses hold goods for moderate to long periods. Distribution centres operate as central locations for fast movement of goods to retail stores. Organized retailers, who have large number of outlets in a particular area, use regional distribution centres where suppliers bring products in bulk.

These shipments are broken down into loads that are then quickly transported to retail outlets. Distribution centres are highly automated. A computer reads orders and controls fork lift trucks that gather products and move them to loading bays.

A company’s warehousing strategy involves the determination of the location and number of warehouses to have. At one extreme, it can have one large warehouse to serve the entire market, and at the other extreme, it can have a number of smaller warehouses that are located in its local markets.

The latter arrangement improves customer service, but its cost is higher. The optimum number and location of warehouses is a balance between customer service and cost considerations.

Mode of transportation:

The selection of mode of transport will depend on the type of product, urgency of delivery and the volume being transferred. A company can use any one or a combination of the following means for transporting their goods.

Rail: is efficient at transporting large bulky freight over long distances, but they lack flexibility. There is additional transport by trucks to and from a rail station. For small quantities, the use of rail is uneconomical.

Road: is flexible because of direct access to companies and warehouses. Trucks can transport goods from the supplier to the receiver without unloading en route.

Air: Its advantages are speed and long distance capabilities. It is used to transport expensive, perishable and emergency goods. It reduces in-transit and safety inventory, but it is costly. There is also need to transport goods by road to and from the air terminals.

Water transportation: It is slow but cheap. It is used to transport bulky, low value, non-perishable goods. Road transportation of goods to and from docks is needed.

Pipeline: It is a dependable means for transporting liquids and gases. Construction is expensive and time consuming, but it requires low maintenance.

Materials handling:

Materials handling is moving of products inside the manufacturer’s plant, warehouses and transport depots. Modern storage facilities are one storey, allowing high level of automation.

Two modem developments in material handling are Unit handling and Containerization. Unit handling combines multiple packages on to pallets so that they can be moved by fork lift trucks. Containerization combines many quantities of goods into a single large container. The container is sealed, and then it can be easily transferred from one mode to another.

Packaging must be sturdy enough to withstand the rigours of physical distribution. They should also be repackage able into larger ones for transportation.